Policymakers are coming under increasing pressure to attempt to stymie what many regard as an overheating UK property market.
But experts warn that many of the possible policy levers, such as paring back Help to Buy or capping LTVs, are likely to have little positive impact and the effects of ending the Government’s Funding for Lending Scheme and the introduction of the MMR have yet to be felt.
At the weekend, Bank of England governor Mark Carney said the housing market presents the “biggest risk” to the economy. Although Help to Buy is still relatively small with only 17,395 mortgages sold through both parts of the scheme by March across the UK, he warned that this could grow into a problem and said the Bank would remain “vigilant”.
Last September, Chancellor George Osborne asked the Bank to monitor Help to Buy to ensure it did not fuel a property boom. If the Bank has any advice for Osborne, it could come from the Financial Policy Committee’s financial stability report next month or its first annual Help to Buy report in September.
Despite rejecting media reports in January that he wanted to reduce the £600,000 cap on Help to Buy, Carney is considering providing advice on “changing the terms” of the scheme.
Should H2B scheme be amended?
John Charcol senior technical manager Ray Boulger says any such move would be targeted at cooling the London market, which, according to the Office for National Statistics, has seen prices rise by more than 17 per cent in the past year – over twice the national average. But Boulger says lowering the cap as former chancellor Lord Lawson recently recommended would make little sense.
He says: “Most people in London are using the scheme for properties between £300,000 and £400,000 so cutting it would be more of a political stunt than an effective policy.”
A closer inspection of the Help to Buy statistics suggests the scheme is playing only a minor role in London’s current property boom. Both parts of Help to Buy have been responsible for just 1,095 transactions in London since part one began in April 2013, compared with 2,058 in the North-west. There were 66,100 property transactions in London between last April and December, according to the latest statistics from the Council of Mortgage Lenders.
“The best course of action for the Bank would be to reduce LTIs, particularly because they are higher in London than elsewhere.”
Help to Buy part one offers buyers a five-year interest-free loan worth up to 20 per cent of the house’s value for new-build properties, enabling people to get a 95 per cent LTV mortgage. It is currently planned to run until 2020. Part two is set to close in 2016 and is a mortgage indemnity scheme in which, for a lender fee, the Government guarantees part of the mortgage.
Changing the terms of the scheme could also mean changing the size of the interest-free loan from the Government in part one or the fee for lenders for the indemnity scheme in part two. But if Henderson chief economist Simon Ward is right, part two may well be cut before 2016.
“Despite having an impact on price perceptions, it has actually done little to increase demand, so I expect the FPC to recommend that part two goes in its June report,” he says.
Capital Economics property economist Matthew Pointon says part one will survive because it is available only on new-build properties. For part two, he says: “They could cut back the £600,000 limit as a first step but they should scrap part two entirely ahead of 2016 because it is not helping the real problem: lack of supply.”
Boulger adds that a healthy reinsur-ance market provides a simple exit strategy for the guarantee part of the scheme.
The impossible London dilemma?
Lentune Mortgages is based in the New Forest. Managing director Stuart Gregory says: “There is no boom here. London is the problem but less than 1 per cent of transactions there are through Help to Buy. It is not the real enemy.”
So what to do? The Bank of England’s executive director, Spencer Dale, told the Treasury select committee last month that although the FPC could design and apply a regional instrument, he thought it unlikely as high house prices in one region would not pose a risk to financial stability.
London & Country associate director David Hollingworth thinks any regional tool would have “major issues”. He says: “People in different postcodes will be treated differently and there will be those awkward cases where people on one side of a street get treated very differently from those on the other.”
In an interview with Sky News at the weekend, Carney acknowledged a “heavy foreign purchaser element” that poses problems for the market in London, adding that this is a “political issue” and not a matter for the Bank. Experts suggest the introduction of capital gains tax for foreign property owners from next April and the new 15 per cent rate of stamp duty if a property is bought through a company are unlikely to cool demand.
Boulger says possible levers such as capping LTVs are unlikely to have much effect in London. He says: “Around 40 per cent of London properties are bought for cash. Lots have LTVs of 60 to 65 per cent and around 60 per cent of funds used to pay for them are not mortgages. So the one part of the country where there is a case to act to deal with house prices is the one area where it will have the least effect.”
Weapon of Choice
The Bank of England’s inflation report, published last week, shows LTV ratios have remained below pre-crisis levels while loan-to-income ratios have risen, particularly for high-value properties. Ward says this could indicate where the Bank will take action.
One way to bring down LTIs would be to impose a cap. But Boulger says this would “tread on the MMR’s toes”, replacing a sophisticated affordability judgement with a crude cap. Pointon says: “The best course of action for the Bank would be to reduce LTIs, particularly because they are higher in London than elsewhere. One way to do that would be to toughen up the stress tests in the MMR. If that does not work, the Bank could look to direct the FCA to impose a cap but that would be someway off.”
Lenders have to test their capacity and that of borrowers to absorb interest rate rises in line with market expectations over a five-year period. Many are currently working on the basis that rates could rise to around 7 per cent over that period.
Boulger says: “Changing the stress tests would be moving away from the basics and would hit some more than others. Those with higher incomes would be less affected. A simple measure would be to make lenders hold more capital across the board. Whatever the Bank does, it should be at the macro level with lenders left to interpret that, rather than micro-managing the market which it will almost certainly get wrong.”
Too far too fast
Others warn against further action before the effects of steps already taken have been seen. From 31 January, mortgages were excluded from the FLS scheme, prompting a rush from lenders to take advantage of the cheap funding.
In the final three months, lenders drew down £18.8bn – a huge increase on the £5.5bn drawn in the previous quarter.
According to the CML, mortgages advanced in Q1 2014 decreased by 16 per cent year-on-year from Q4 2013.
Ward says: “Approvals have also come off the boil and I think house price rises will slow over the summer. My concern is that the economy continues to run hot and pressure for a rate rise will remain even if housing becomes less of the focus. They need to be careful about going too far too fast.”
ADVISER VIEW: Alec Ruthven
“By the time Help to Buy came in the market was already sorting itself out. It has helped things but they should look at cutting it back, perhaps only allowing first time buyers to use it.”
Alec Ruthven is director at AM Ruthven & Associates
ADVISER VIEW: Ian Howell
Capital Tower IFA Ian Howell: “There is obviously pressure to make
changes to Help to Buy but everyone likes to see the value of their house going up so I cannot see anything being done about it before next year’s general election.”
Ian Howell is IFA at Capital Tower
EXPERT VIEW: Mark Chilton
This weekend’s pronouncement from Mark Carney and its response from George Osborne add to the increasing concern that the apparent current housing bubble is the greatest threat to the economic recovery. They are implying that Help to Buy is the major cause and thus must be curtailed. But is this analysis correct?
We see headline House Price Index numbers implying a bubble is building but underlying this is the vast difference between London, including parts of the South-east, and the rest of the country. In the former, Help to Buy is not a significant factor. Relatively few Help to Buy new-build schemes are available and the major driver is overseas buyers arriving in droves not just in prime central London but further out as well.
Elsewhere in the UK, house prices are going up in patches but for the most part are returning simply to their long-term trend prior to the recession. And in those areas, Help to Buy is doing exactly the job it was intended to: getting new buyers onto the housing ladder.
However, I think we have a problem building slowly outside London because, eventually, the failure to build adequate new homes will push prices up further. And in London the lack of affordable homes is adding already to the factors above.
I also remain concerned about the way in which developers price Help to Buy property and the impact this has on price inflation – but that is a separate debate about the controls necessary.
So if Help to Buy is not the risk to the recovery that is being mooted, what in the housing sector is?
Well, it is our old friend payment shock. Ask any lender about prime causes of arrears and payment shock from interest rate hikes is a major driver. And despite the recent impact of the MMR, we really are in uncharted waters with rates due to rise from such a long-term historic low.
At a time when Carney has also said the cost-of-living crisis is behind us, any ill-judged hikes in interest rates could have disastrous effects on both the recovery and mortgage arrears.
Mark Chilton is chief executive at MAC Consulting